Role of Credit Rating Agencies in Capital Markets

The companies that assess the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts are often referred to as a credit rating agency. The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honour its debt obligations as agreed. Credit rating agencies analyse the risk of default as compared to other issuers in the market. The creditworthiness of a financial system is rated by these agencies. The rating may help the investors to understand the correlation between risk and return of an instrument. Most of the investors analyse these rating to decide on their investment.

Credit Rating Agencies in India

There are five credit rating agencies in India.

•  CRISIL (Credit Rating Information Services of India Limited)
• ICRA (Investment Information and Credit Rating Agency of India)
•  CARE (Credit Analysis and Research Limited)
• ONICRA (Onida Individual Credit Rating Agency of India)
•  SMERA (Small Medium Enterprises Rating Agency Of India Limited)

Usually, credit ratings follow a scale of AAA the highest rating to D (lowest). There are eight tiers – AAA, AA, A, BBB, BB, B, C and D

Benefits of Credit Ratings to Investors

Help in decision-making – Credit rating of an instrument can be used by the investors to know the risks associated with it. This helps the investors to select the instruments for their preference.

Regular reviews of ratings – Credit rating agencies regularly review the ratings of financial systems. This is done to ensure that it is relevant to the existing condition of the issuer and market. So if an investor has purchased an instrument with the highest rating but finds it is going down, then he can decide to sell the instrument to curb the losses.

Assurance of safety – An instrument with a high credit rating gives the investors the safety feeling of their investment and the financial strength of the issuer.

Saves time & effort – Understanding the financial strength of issuing company takes a lot of effort and time and requires some financial competence. The credit rating issued by the professional agencies ensures that all the important factors are taken into consideration. So the investors can depend on these ratings and save a lot of time and effort.